While the deepening housing crisis has caused a flurry of homebuilders to unload their land holdings and take write-downs, a savvy group of investors are happily snapping up the land — and getting double-digit returns.
These investors, which include land bank companies and vulture funds, predict even more buying opportunities in the months ahead as cash-strapped banks start selling off foreclosed land parcels at fire sale prices.
"I see a window of buying opportunity over the next six months," said Mike Chasse, senior homebuilding adviser at Land Advisers Organization in Scottsdale, Ariz., who has seen land values rise and fall through multiple cycles. He thinks that gains from land purchases made now could be as big as those enjoyed by investors who bought property from the government-owned Resolution Trust Corp. in the early 1990s.
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The nation's homebuilders have been aggressively selling land options and parcels of land since they first detected signs of a housing slowdown in 2006. Falling home prices, a pullback in housing demand and rising inventories forced builders to reassess and write down the value of their land holdings as many found they could no longer turn a profit on homes built on pricey land parcels purchased years earlier.
The write-downs and land sales were aimed at preventing a repeat of the problems that caused builders to crash and burn in the early 1990s.
Indeed, the country's large, publicly traded builders have taken about $30 billion in write-downs related to land options and land holdings since mid-2006, said Alex Barron, a senior research analyst in the El Paso office of Agency Trading Group Inc. of Wayzata, Minn.
But for land investors, the distress means opportunity.
Walton International Group Inc., a Calgary, Alberta, land company, has been on a buying spree, snapping up parcels in both Canada and the United States on the cheap.
"The objective is to take advantage of downturns in the market, like the one we're in now," said Matt Keister, senior vice president of operations in Walton's Scottsdale, Ariz., office. "A lot of the homebuilders cannot afford to keep dirt on their books, because it's creating no profit for them and bogging down their balance sheets."
Walton owns 57,000 acres of land, up threefold from the 17,500 acres it held in 2005, according to Mr. Keister. And he expects the tally to exceed 75,000 within six months.
Walton pays cash for the land and therefore doesn't face the loan and leverage issues that homebuilders do. The company works through broker-dealers in the United States, Germany, Southeast Asia and Canada to find investors who plunk down cash on a parcel of land that Walton owns and reap the returns when the property is sold to a developer or homebuilder, typically three to six years later.
Walton's track record is compelling: The company has delivered average annualized returns of 23.6% since its inception in 1979, according to Mr. Keister.
Walton and Avanti Properties Group LLP in Winter Park, Fla., are among the large pure-play land-banking firms. There are also a number of smaller players that focus on single markets, and some larger firms, such as Wolff Cos. in Scottsdale, that buy land as a portion of their overall real estate strategy.
The most telling sign of the buying opportunities is the growing number of private-equity and insurance company funds that have cropped up in the past year to buy land.
"There are about 150 or 200 private-equity funds that have been established that have anywhere from $200 million to $1 billion that they plan on investing in distressed residential lots and raw land," said Jim Belfiore, president of Belfiore Real Estate Consulting of Phoenix.
New York-based Morgan Stanley raised eyebrows late last year when it purchased 11,000 home lots from Miami homebuilder Lennar Corp. for one of its funds. "It shows people are starting to really take a look at this particular asset class," Mr. Keister said.
Industry experts expect the next wave of land sales to come from banks, which took back land from distressed private builders.
"The banks are going to start liquidating [the land parcels]. We're getting to the point where there will be many, many transactions — they're being negotiated right now,"Mr. Belfiore said.
"Their hand is starting to be forced a little bit," said Dirk Riekse, a senior vice president in the Chicago office of Grubb & Ellis Co., a commercial real estate services company in Santa Ana, Calif.
But land buying isn't without risk.
First, there is no guarantee that a particular parcel of land will be sold to a developer within the planned time frame. Second, activities or unforeseen events in a particular market could cause the value and demand for a particular lot to fall unexpectedly.
"Every investor's objective should be to buy low and sell high, and that's what we do," Mr. Keister said.
E-mail Janet Morrissey at jmorrissey@investmentnews.com.
